Ratio Calculations

The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.

Solution Summary

Detailed Calculations are provided for the following questions:

Questions 14-20

Please use this data to complete questions 14-20.

The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)

Assets
2010

Cash and securities
$1,554.0

Accounts receivable
9,660.0

Inventories
13,440.0

Total current assets
$24,654.0

Net plant and equipment
17,346.0

Total assets
$42,000.0

Liabilities and Equity

Accounts payable
$7,980.0

Notes payable
5,880.0

Accruals
4,620.0

Total current liabilities
$18,480.0

Long-term bonds
10,920.0

Total debt
$29,400.0

Common stock
3,360.0

Retained earnings
9,240.0

Total common equity
$12,600.0

Total liabilities and equity
$42,000.0

Income Statement (Millions of $)
2010

Net sales
$58,800.00

Operating costs except deprâ??n
$54,978.0

Depreciation
$1,029.0

Earnings before int. and taxes (EBIT)
$2,793.0

Less interest
1,050.0

Earnings before taxes (EBT)
$1,743.0

Taxes
$610.1

Net income
$1,133.0

Other data:

Shares outstanding (millions)
175.00

Common dividends
$509.83

Int rate on notes payable & L-T bonds
6.25%

Federal plus state income tax rate
35%

Year-end stock price
$77.69

1. What is the firm's current ratio?
0.97
1.08
1.20
1.33

2. What is the firm's quick ratio?
0.49
0.61
0.73
0.87

3. What is the firm's total assets turnover?
0.90
1.12
1.40
1.68

4. What is the firm's inventory turnover ratio?
4.38
4.59
4.82
5.06

5. What is the firm's debt ratio?
45.93%
51.03%
56.70%
70.00%

6. What is the firm's ROA?
2.70%
2.97%
3.26%
3.59%

7. What is the firm's ROE?
8.54%
8.99%
9.44%
9.91%

$2.19

See Also This Related BrainMass Solution

Accounting

13-4
The following data have been collected for the past two years for the Northern Division of Loring Company:

REQUIRED:
1. COMPUTE THE MARGIN AND TURNOVER RATIOS FOR EACH YEAR.
2. COMPUTE THE ROI FOR EACH YEAR.
3. EXPLAIN WHY THE DIVISION EXPERIENCED A DECREASED A ROI FROM 2005 TO 2006.

13-6
CHERYL MANNERS, DIVISION MANAGER OF RADIOTECH, INC., WAS DEBATING THE MERITS OF A NEW PRODUCT-A WEATHER RADIO THAT WOULD PUT OUT A WARNING IF THE COUNTY IN WHICH THE LISTENER LIVED WAS UNDER A SEVERE THUNDERSTORM OR TORNADO ALERT. THE BUDGETED INCOME OF THE DIVISION WAS $480,000 WITH OPERATING ASSETS OF $8,000,000. THE PROPOSED INVESTMENT WOULD ADD INCOME OF $270,000 AND WOULD REQUIRE AN ADDITIONAL INVESTMENT IN EQUIPMENT OF $1,500,000.

REQUIRED
1. COMPUTE THE ROI OF:
A. THE DIVISION IF THE RADIO PROJECT IS NOT UNDERTAKEN
B. THE RADIO PROJECT ALONE
C. THE DIVISION IF THE RADIO PROJECT IS UNDERTAKEN

2. DO YOU SUPPOSE THAT CHERYL WILL DECIDE TO INVEST IN THE NEW RADIO? WHY OR WHY NOT?

16-2
SUPPOSE THAT THE ADAMS COMPANY SELLS A PRODUCT FOR $16. UNIT COSTS ARE AS FOLLOWS:

DIRECT MATERIALS $3.90
DIRECT LABOR $1.40
VARIABLE OVERHEAD $2.10
VARIABLE SELLING EXPENSES $1.60
TOTAL FIXED OVERHEAD IS $52,000 PER YEAR, AND TOTAL FIXED SELLING AND ADMINISTRATIVE EXPENSES ARE $37,950. NORMAL PRODUCTION IS 13,000 UNITS PER YEAR.
REQUIRED:
MATCH A TERM FROM COLUMN A WITH THE CORRECT NUMBER BASED ON THE ABOVE INFORMATION FOR ADAMS COMPANY IN COLUMN B.

REQUIRED:
1. WHAT IS THE CONTRIBUTION MARGIN PER UNIT FOR KERRISK COMPANY? WHAT IS THE CONTRIBUTION MARGIN RATIO?
2. WHAT IS THE VARIABLE COST RATIO FOR KERRISK COMPANY?
3. CALCULATE THE BREAK- EVEN REVENUE.
4. HOW MUCH REVENUE MUST KERRISK MAKE TO ERAN OPERATING INCOME EQUAL TO $9,900?

17-7
SHERWOOD COMPANY IS CURRENTLY MANUFACTURING PART Z911, PRODUCING 40,000 UNITS ANNUALLY. The part is used in the procution of several products made by Sherwood. The cost per unit for z911 is as follows:

OF THE TOTAL FIXED OVERHEAD ASSIGNED TO Z911, $88,000 IS DIRECT FIXED OVERHEAD (THE LEASE OF PRODUCTION MACHINERY AND SALARY OF A PRODUCTION LINE SUPERVISOR- NIETHER OF WHICH WILL BE NEEDED IF THE LINE IS DROPPED). THE REMAINING FIXED OVERHEAD IS COMMON FIXED OVERHEAD. AN OUTISDE SUPPLIER HAS OFFERED TO SELL THE PART TO SHEWOOD FOR $16. THERE IS NO ALTERNATIVE USE FOR THE FACILITIES CURRENTLY USED TO PRODUCE THE PART.
REQUIRED:
1. SHOULD SHERWOOD COMPANY MAKE OR BUY PART Z911?
2. WHAT IS THE MOST SHERWOOD WOULD BE WILLING TO PAY AN OUTSIDE SUPPLIER?
3. IF SHERWOOD BOUGHT THE PART, BY HOW MUCH WOULD INCOME INCREASE OR DECREASE?

18-2
EACH OF THE FOLLOWING PARTS IS INDEPENDENT. ASSUME ALL CASH FLOWS ARE AFTER-TAX CASH FLOWS.
1. KAYLIN DAY HAS JUST INVESTED $480,000 IN A BOOK AND VIDEO STORE. SHE EXPECTS TO RECEIVE AN INCOME OF $144,000 PER YEAR FROM THE INVESTMENT. WHAT IS THE PAY-BACK PERIOD FOR KAYLIN?
2. JAN BOOTH PLACED $128,000 IN A 3 YR SAVINGS PLAN. THE PLAN PAYS 5 PERCENT, AND SHE CANNOT WITHDRAW THE MONEY EARLY WITHOUT A PENALTY. ASSUMING THAT JAN LEAVES THE MONEY IN THE PLAN FOR THE FULL THREE YEARS, HOW MUCH MONEY WILL SHE HAVE?
3. COLBY HEPWORTH, MANAGER OF THE FEDER CREDIT UNION, IS CONSIDERING THE PURCHASE OF A NEW AUTOMATED TELLER SYSTEM. THE CASH BENEFITS WILL BE $208,000 PER YEAR. THE SYSTEM COSTS $1,088,000 AND WILL LAST TEN YEARS. COMPUTE THE NPV SUMING A DISCOUNT RATE OF 12 PERCENT. SHOULD THE BANK BUY THE NEW TELLER SYSTEM?
4. EMILY HANSEN HAS JUST INVESTED $200,000 IN A COMPANY. SHE EXPECTS TO RECEIVE $32,200 PER YEAR FOR THE NEXT EIGHT YEARS. HER COST OF CAPITAL IS 6 PERCENT. COMPUTE THE INTERNAL RATE OF RETURN. DID EMILY MAKE A GOOD DECISION?